All posts tagged u.k.

Are we really going to have to endure years of endless banter about the U.K. leaving the European Union?

Um, probably.

How could it not be, after U.K. prime minister David Cameron offered his odd political ploy: a straight-up yes/no referendum in the U.K. on staying in the European Union. In 2017. If he’s reelected in 2015.

Cameron laid down a challenge to fellow European leaders, calling for a bloc-wide negotiation of a new treaty, but adding that the U.K. will pursue separate talks if that isn’t possible. He dwelled at length on the bloc’s current shortcomings, which he said had led to growing popular frustration across its membership, citing street protests in Athens, Madrid and Rome, and heated disputation in parliaments in Berlin, Helsinki and The Hague.

The markets’ first verdict on David Cameron’s big European Union speech: Modest thumbs up.

U.K. 10-year gilts weakened very slightly during his speech, and were yielding 2.01%, but sterling gained ground more sharply against the dollar and the euro. It was at $1.5845 shortly after the speech.

Mr. Cameron’s speech, which offered Britons an in-or-out vote on the U.K.’s EU membership, was foremost a political maneuver. His conservative party, and many in the U.K., have long nurtured a skepticism of Europe’s centralized regulation and decision-making.

But Britain’s place in Europe has large financial and economic ramifications, too.

The Fed did essentially nothing today, and is holding a press conference to explain why it’s doing nothing. Apple, well, what more do you want to hear about Apple? It operates in its own orbit, apparently. Stocks are rising, bonds are falling, and all seems well in the land of Coca-Cola.

But things aren’t so sunny in the Blessed Plot. The U.K. posted a 0.2% slide in GDP in the first quarter, sinking the country back into recession, another nation seeing its economy dragged down by the harsh medicine of austerity.

Yet, remarkably, news that the world’s seventh largest economy is back in recession has garnered almost no attention.

When the U.K. pulled out of Europe’s Exchange Rate Mechanism in the early 1990s, some predicted disaster, but that “Black Wednesday” actually brought brighter times to the British Isles.

The same story might play out when the euro as we know it inevitably falls apart, despite George Soros’s predictions to the contrary.

Soros would know a little something about the disintegration of a currency union: Most argue he was responsible for the collapse of the ERM when he “broke the Bank of England” and took home a handy $1 billion by betting against the pound.

IntercontinentalExchange will pick up and leave the United Kingdom if policy makers embrace a tax on financial trades, CEO Jeff Sprecher said on the company’s earnings conference call this morning.

He added that his firm’s presence in London is a “privilege” and not a right for the country.

Though ICE favors the Greenwich Mean Time zone, Sprecher says “there’s no natural reason for us to be in the UK,” and ICE could “easily move” if there are changes to the market structure that hit the exchange group or customers.

Sprecher notes the UK previously hasn’t expressed much support for trading tax concept, which has more traction in France and Germany.

ICE shares were recently up 3% at $127.05.

Sprecher’s discussion comes on a day when Democrats in Congress plan to introduce legislation proposing a transaction tax in the US.

Now that the US has been smacked with the downgrade stick, the market is starting to look around the world and wonder what other sovereigns out there are overrated. Quite a few, it turns out.

The reigning maven of sovereign ratings, Win Thin at Brown Brothers Harriman, in a note this morning, plugs a bunch of sovereigns into his credit-rating model and finds that the UK, France and Belgium ought not spend too much time dancing on America’s grave:

China’s upstart Dagong Global Credit Rating Agency has made waves in the past year with aggressive downgrades of U.S. sovereign debt, cutting Uncle Sam from AAA to AA last July and then to A+ last November.

Today they’re back in the downgrading game, cutting the UK to A+ from AA-.

“The downgrade reflects the true status of the deteriorating debt repayment capability of the U.K. and the difficulty in improving its sovereign credit level in a moderately long term in the future,” Dagong said in a statement.

“Considering that the uncertainty arising from (future) monetary policy adjustments of the Bank of England and the spillover effect of the European countries…are likely to further worsen the government’s fiscal status, Dagong gives the negative outlook on the local and foreign currency sovereign credit rating of the U.K. (for the next) one to two years,” Dagong said.

The market is not responding, either because Dagong is not saying anything nobody already knew, or because Dagong isn’t exactly a household name among rating agencies. UK’s credit-default-swap spread is down a bit today to 59 basis points, according to Markit, meaning it costs $59,000 to insure $10 million of UK debt for five years.

That’s a little bit higher than the CDS spread for the A+-rated (by Dagong, anyway) United States, which is down to about 47.5 basis points today.

Inflationistas are getting an eyeful of news this morning, mostly from across the Atlantic.

In the U.K., consumer prices rose 4% in January, double the Bank of England’s stated target of 2%. That figure is up from 3.7% in December and 3.3% in November. Further east, Poland reported a 3.8% increase in its CPI, increasing expectations that Warsaw will raise short-term rates as soon as next month.

The U.K.’s central bankers have taken a more sanguine approach to inflation. The Bank of England notes that the Value-Added Tax (VAT) rose 2.5 percentage points on Jan. 3, giving inflation a push. Moreover, it argues (correctly) that wage gains are not strong and (less convincingly) that there is still a lot of slack in the economy. Their message: we are not inclined to raise short-term rates anytime soon.

The inflation issue in the U.K. is exceptional among developed economies. The euro-zone is seeing prices flicker around their target of 2%. The U.S. has core inflation lower than 2% and Japan can only dream about inflation.

In the City of London, economists are dueling hard, with some, such as ING, calling for an increase in short-term rates to stymie inflation, others saying no action is the correct course. J.P. Morgan, in a long report on the subject, confesses some mystification at the persistent inflation rate, but largely agrees with the Bank of England view that consumer prices will soon start to decline.

Lastly, this morning’s U.S. retail sales report also included a morsel of inflation news, with import price data showing an upward push. “The import price data normally does not get much attention, but it should do so now that there are very clear signs that imported manufactured prices are increasing, notably from China,” writes Alan Ruskin at Deutsche Bank. “China no longer looks like a disinflationary force, and there is tentative evidence that it is turning inflationary.”

Fears that Europe’s banks are vulnerable to losses on risky government bond investments are sending shivers through the European bond markets, especially Ireland and Greece. Investors are dumping risky bonds tied to weaker European economies and crowding into the safe havens of German and British government bonds.

Ireland, which is grappling with an increasingly expensive bail-out of troubled lender Anglo Irish Bank, is the single worst performer Tuesday.

The latest report on Britain’s inflation problem should make enjoyable reading for Bank of England governor Mervyn King and his colleagues on the Monetary Policy Committee. Figures released Tuesday show annual consumer-price inflation in Britain edged down to 3.1% in July from 3.2%, meeting economists’ expectations and continuing the steady downward trek that BOE monetary-policy makers have long argued is in the cards.

Of course, by law, Mr. King still has to write a letter to Britain’s Treasury chief explaining why inflation still remains more than a percentage point higher than the BOE’s medium-term target of 2%. Since December of last year, Britain has had a wee bit of an inflation issue, sparking some head-scratching among analysts given that inflation remains very subdued in the U.S. and euro zone. Bank officials have clearly decided to focus on nurturing economic growth rather than tackling inflation by raising interest rates.

We’re definitely diving deeper into the summer doldrums this week, with investors trading baseball cards instead of currencies, but there are still plenty of market-moving events in the British Isles. Perhaps most important is Ireland’s bond sale Tuesday.

Ireland’s Treasury will raise up to 1.5 billion euros of new funding by selling longer-term bonds amid renewed concerns about its public finances. Analysts expect the bond sale to go off smoothly, but just like last week, the former Celtic Tiger is probably going to have to pay unusually high interest rates to borrow.

The pound stumbled Wednesday after the Bank of England cut its forecasts for U.K. economic growth in its quarterly Inflation Report.

Sterling fell to $1.5708 against the dollar from around $1.5750, taking it to a low for the day, but only barely below Tuesday’s lowest point. The euro climbed to 0.8312 pound from around 0.8290 pound. The spike was still below the day’s high of 0.8321 pound. Bank of England governor Mervyn King is still speaking, so further moves can’t be ruled out.

For the first time since December, profit-seeking traders are neither overly positive nor overly negative on the pound right now, judging by weekly data from the Commodity Futures Trading Commission. Although those figures don’t capture the whole of the market, they do indicate that the currency is open to movements in either direction, depending on what Mr. King says in the press conference from here.

At 0940 GMT, the pound was at $1.5716, while the euro was at 0.8302 pound, according to trading system EBS.

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